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Should the Malaysian islamic stock market investors invest in regional and international equity markets to gain portfolio diversification benefits?

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  • Umairah, Fatin
  • Masih, Mansur

Abstract

The paper asks the following questions: (i) What is the extent of the dynamic linkage of the conventional and Islamic stocks with the Malaysian Islamic stock market? (ii) Should the Malaysian Islamic stock market investors invest in (regional and international) conventional or Islamic equity market to gain international portfolio diversification benefits? (iii) How would the portfolio diversification benefits of the Malaysian Islamic investors change given different investor stock holding periods (e.g. 2-4 days, 4-8 days, 8-16 days, etc.)? The appropriate methods employed to addressing these questions are MGARCH-DCC and Continuous Wavelet Transformation (CWT). The data period covered is 2007 – 2017. The results tend to indicate that the FTSE Bursa Malaysia Hijrah Shariah Index has low correlation with the global stock market index, regardless of conventional or Islamic. However, the correlations in between the Islamic stock markets are quite high. Malaysian Islamic stock market investors who have allocated their investment in the global markets may enjoy portfolio diversification benefits. However, Malaysian Islamic stock market investors may not enjoy the real benefit if they allocate their funds in Dow Jones Islamic Asia Pacific Market but interestingly the medium-term investors may benefit from their investment. Also, the Malaysian Islamic stock market investors may lose if they invest in the conventional Malaysia Stocks Market (EMAS) as they may consist of the same stocks. Overall, the results tend to indicate that the Malaysian Islamic stock investors can reap the benefits of portfolio diversification in the regional and international equity markets if they take care of the extent of correlations between stocks at different investment horizons.

Suggested Citation

  • Umairah, Fatin & Masih, Mansur, 2017. "Should the Malaysian islamic stock market investors invest in regional and international equity markets to gain portfolio diversification benefits?," MPRA Paper 82117, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:82117
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    More about this item

    Keywords

    Stock market; Dynamic linkage; MGARCH; Wavelet Coherence; Malaysia; FTSE Hijrah Shariah Stock Index;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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